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Choose your private equity manager carefully

VCTs and EISs rely on their managers' ability to select investments and dispose of them at a profit
Choose your private equity manager carefully

It is always important to pick a financial product run by competent people. But in the case of private equity investments such as venture capital trusts (VCTs) and enterprise investment schemes (EIS), it is even more crucial. Private equity funds’ returns rely on the ability of their managers to select and monitor investments carefully, and dispose of them at a profit.

The due diligence required for small unquoted companies is more rigorous than that for a listed company because there is less publicly available information. Unquoted companies are also likely to be younger than many listed companies so don't have a long track record to analyse. This means that VCT and EIS managers need to be able to spot potential, so require knowledge, expertise in and experience of investing in the sector the company is in.

They also need the contacts and ability to eventually make an exit at a good price because that is how private equity funds make their returns.

EISs hold few investments, and sometimes just one, making their managers' ability to pick the right ones even more important. With these you are also making a new investment into a company rather than an existing fund so cannot assess its past performance. But you can look at the manager’s experience of managing EISs and investing in the sectors on which the EIS you are considering will focus. Also look at how the manager’s existing and past EISs are doing.

VCTs are funds so you can look at their past performance records and the extent to which they have hit their dividend targets – an important component of their returns. But due to a number of investment rule changes affecting VCTs between 2015 and 2019, make sure that their managers have the right expertise to invest under the new rules and employ specialists in the growth focused areas into which they are putting new money.

Also check how willing a VCT's manager is to do share buybacks to control any discounts to net asset value.